Modified Call Butterfly is a four-legged strategy where one lot of Call close to current underlying level is bought against that two lots of higher strike calls are sold and one more lot of Call is bought but closer to the call sold strike
It was the week that brought back smile on many faces that got disappointed after the pullback that happened after late September rise.
It was a topsy-turvy recovery, however, both Nifty and Bank Nifty managed to post close to percent gains this week with last session positive end.
On the open interest front too, we had a lot of pessimism exiting this week, especially when we opened for trade mid-week after the trading holiday.
The short-covering move did not last long, however, the short-covering overweighed on the minor longs added towards the end of the week and both Nifty and Bank Nifty futures shut shop for the week with a drop in open interest.
Stock futures too had a mix of Short Covering and Longs across the board. This week though the number of stocks losing OI outnumbered the number of stocks gaining it. Even within the sectors, we had instances of mix of longs and short covering.
Telecom saw the biggest gain with both Bharti Airtel and Vodafone Idea gaining extensively and adding fresh longs. Activities were quite mixed due to the weekly volatility. Siemens in Capital Goods led the OI increment, NBFC had short in Indiabulls Housing. We had longs in Biocon and shorts in Aurobindo Pharma with a mix of Longs (KOTAK) and short covering (ICICI Bank) in private banks.
On the risk front, India VIX after hitting the recent upper band around 18 seems to have quite down a bit. Higher realized volatility still remains a concern and big contributor to higher levels of Implied Volatility. Nonetheless, we could see India VIX softening by a point this week
On the options front too, the pessimism was called out as earlier this week the Open Interest Put Call Ratio hit its lower bound close to 0.95. The recovery post that is a testimony to the mean reverting characteristic of these sentimental indicators.
Among individual strikes, the monthly series remain fairly upbeat with congestion in 11,000-11,200 area in Nifty and heaviest Put built at 28,000 in Bank Nifty. Immediate congestion on the higher side seems around 11,500 for Nifty when all expiries are combined.
Pessimism getting bought into with a mix of short covering and fresh longs is indicative of longevity of the recovery. Hence, Modified Call Butterfly is advised to articulate moderation in the risk profile as well as to keep the cash registers ringing if we go over 11,500 till next weekly expiry.
Modified Call Butterfly is a four-legged strategy where one lot of Call close to current underlying level is bought against that two lots of higher strike calls are sold and one more lot of Call is bought but closer to the call sold strike. This keeps the lower but constant profits in case of upward breakout. This is a fairly risk averse and a universal strategy.
(The author is President at Quantsapp)